Must-Know Information About California Professional Corporations

In order to form your California Professional Corporation, “Articles of Incorporation” must be prepared and filed with the Secretary of State along with the necessary state fees. Following registration with the state, the Corporation is required to adopt bylaws, hold an initial meeting of the directors and shareholders as well as issue shares of stock to the owners. California also requires corporations to file a Statement of Information within 90 days of incorporation.

One thing to keep in mind is that most professional corporations have limits as to who can be a shareholder, officer, or member of the Board of Directors. Generally, they have to be a licensed professional in the professional corporation they wish to join (i.e. physical therapist owning shares of a physical therapy corporation, etc.). Specifically, they have to be one of the license-types as delineated for each professional corporation type under the Corporations Code. 

Advantages of Incorporating

Below, please find some general benefits of incorporating your professional practice:

• Multiple owners. 
• Limited liability protection. Owners typically are not liable for negligence of other owners, agents, officers, or employees.
• Tax deductible expenses. Business expenses may be tax-deductible.
• Unlimited life. Transfer of stock or death of an owner does not alter the corporation, which exists perpetually, regardless of owners, until it is dissolved.
• Easy transfer of ownership. Ownership is easily transferable through the sale of stock.
• Raise capital more easily. It can be much easier for a corporation to raise capital than it is for a partnership or sole proprietorship because the corporation has stocks to sell.
• Credibility. Corporations may be perceived as a more professional/legitimate entity than a sole proprietorship or general partnership.
• Lower audit risk. Generally, corporations are audited less frequently than sole proprietorships.

C-Corporation

This is the most widely used type of corporation. Probably because it is the default corporation type. 

The C-Corporation suffers from what is called double taxation. In other words, if the corporation generates a profit, that profit is taxed at the prevailing corporate tax rate. If the remaining profit is then distributed to the shareholders as a stock dividend or other distribution, the shareholder must then also pay tax on that income.

There is no limit on the number of shareholders in a C-Corporation. However, in California, if you wish your corporation to be exempt from SEC filing requirements, there is a maximum of 35 shareholders (along with other requirements).

Some additional advantages of a C-Corporation include:

• Attracting employees. Corporations find it easier to attract the best employees who may be lured by stock options and fringe benefits.
• Attracting investment. Similarly,  third party investors are more likely to contribute to a corporation than a partnership or sole proprietorship as there is the possibility of ownership.
• Fringe benefits. C-Corps may deduct fringe benefits (such as group term life insurance, health and disability insurance, death benefits payments up to $5,000, and employee medical expenses not paid by insurance) from their taxes as a business expense.

S-Corporation

S-Corporations, named for the applicable subchapter of the Internal Revenue Code, are generally not taxed as a C-Corporation, rather, they receive similar taxation to that of partnerships. The corporation's income and expenses are passed through directly to the shareholders and reported on their personal tax returns. As a result, S-Corporations do not suffer the double taxation of general business corporations, as with a C-Corporation.

Losses reported on an S-Corporation shareholder's tax return may be used to offset other income or a spouse's income when a joint tax return is filed. S-Corporations must divide income, credits, deductions and losses based on percentage ownership. 

Some of the disadvantages:

• Number of shareholders. S-Corps can only have 100 shareholders or less.
• Type of shareholder. Corporations, nonresident aliens, and most estates and trusts cannot be S-Corporation shareholders.
• Stock. There can only be one class of stock (although differences in voting rights are permitted).
• More expensive to form. S-Corporations are more expensive to form than sole proprietorships and general partnerships, and face ongoing, state-imposed filing requirements and fees.